Identification of tax residents in major countries: impact on taxation of encrypted asset allocation

Author: TaxDAO

1 Introduction

A tax resident refers to a natural or legal person who lives in a country (or has a nationality), enjoys civil rights and assumes civil obligations according to law, and is subject to the jurisdiction of the country's laws. Tax residents usually have unlimited tax liability to the government of their country of residence, that is, they have to pay taxes to the government of their country of residence on their worldwide income.

For multinational encrypted asset investors, tax residency is a very important concept, which concerns the collection method and tax rate determination of encrypted asset taxes. In addition, since different countries or regions have different standards and methods for identifying tax residency status, it may happen that an investor is recognized as a tax resident by multiple countries or regions at the same time, that is, double tax resident. This means that investors may have to pay the same tax in multiple countries or regions. Therefore, it is very important for investors to understand the identification of tax residents in various countries and the corresponding avoidance of double taxation agreements. This article will outline the rules for the determination of tax residents, and on this basis, briefly discuss the avoidance of double taxation.

2 Basic Concepts

2.1 Scope of Tax Residents

Both individuals and corporate legal persons may become tax residents of a certain country or region. Taking mainland China as an example, the identification standard for individual tax residents is "having a domicile in China, or living in China for 183 days in a tax year without domicile." Among them: having a domicile in China means 183 days of residence in China refers to the number of days of temporary departure not exceeding 30 days in one tax year or no more than 90 days accumulatively. ). The identification of legal person tax residents is mainly based on whether it is established in China according to law, or established in accordance with the laws of other countries and regions but the actual management agency is in China. Among them: the actual management institution refers to the institution that implements substantial and comprehensive management and control over the production and operation, personnel, accounts, property, etc. of the enterprise.

2.2 The difference between tax residency and other concepts

Concepts that are easily confused with tax residents include nationality, household registration and habitual residence.

Nationality refers to the political and legal relationship between a citizen and a country, and it is a sign that a citizen belongs to a certain country. The nationality of an enterprise legal person is called the nationality of a legal person, which may be determined according to the establishment, domicile, or nationality of the enterprise's member states.

Household registration, usually specifically refers to the household registration of Chinese citizens, which is the place of residence registered by the citizen in the national household registration authority, and is also the legal residence of the citizen. Article 25 of the "Civil Code" stipulates: "A natural person's domicile is the domicile recorded in household registration or other valid identity registration. If the habitual residence is inconsistent with the domicile, the usual domicile shall be regarded as the domicile." At this time, the registered domicile loses the validity of domicile.

Habitual residence refers to a place where a natural person lives temporarily for a certain purpose and has no intention of staying permanently. The place of habitual residence does not require a specific length of residence time, nor does it require the intention of permanent residence, only actual residence is required. A natural person may have more than one place of habitual residence.

Although the judgment of tax residents sometimes needs to refer to the above concepts, tax residents are not completely consistent with them, and sometimes there may be overlaps or differences. For example:

• A person may be a tax resident of more than one country, but only have the nationality of one country.
• A person may have a domicile in a country but is not a tax resident of that country because he has been working or living outside the country for a long time; similarly, he may not have a domicile in a country but is a tax resident because of family or economic interests in that country. tax resident of the country.
• A person may have habitual residence in a country but not be a tax resident of that country because the length of stay criteria for that country has not been met.

3 Rules for Determining Tax Residents in Major Countries in the World

Determination of tax residency generally refers to the written tax laws or corresponding laws of the local country. However, for common law countries such as Canada and the United Kingdom, there is no clear provision that certain conditions must be considered as tax residents, but a comprehensive judgment is made based on the overall situation of the individual or entity. This article first summarizes the tax residency determination rules of major countries in the world in accordance with relevant laws, regulations and precedents.

In particular, in some countries, although partnerships and pass through entities are not considered tax resident entities for taxation, they still have the obligation to declare financial information as tax residents under the CRS. For example, for the purposes of CRS, a partnership whose place of effective management is located in Canada shall be considered a Canadian tax resident. The purpose of this is to prevent the risk of cross-border tax evasion and strengthen tax source management and information exchange between countries (regions).

4 Double taxation resident status and taxation rules

4.1 Reasons for double taxation resident status

Dual tax resident status refers to the situation that a person meets the tax resident status requirements of two or more countries (regions) at the same time, and thus bears tax obligations in these countries (regions). It mainly comes from the difference in the identification standards of residents. For example, some countries use the place of domicile to judge tax residents, while some countries use the place of habitual residence to judge tax residents, so that the same taxpayer is recognized as a resident in different countries and has unlimited tax obligations.

In order to avoid or reduce double taxation, countries usually sign double taxation agreements (DTAs), which stipulate how to resolve conflicts in the identification of resident status, and give corresponding tax exemption or credit arrangements.

4.2 Taxation rules under the DTA agreement

Generally speaking, the DTA will use the limited residence rule, the priority residence rule and the priority nationality rule to resolve conflicts in the identification of residents. Among them, the tie-breaker rules refer to a series of judgment standards established in international tax agreements to solve the tax attribution of individuals or entities that are residents of both parties. In international tax treaties, the plus ratio rules are usually applied step by step in the following order:

For individuals:

(1) shall be deemed to be a resident of the Party in which he has his permanent residence;

(2) If there is a permanent residence in both parties, it shall be considered as a resident of the party whose personal and economic relationship is closer (center of vital interests);

(3) If the party where the center of vital interests is located cannot be determined, or has no permanent residence in either party, it shall be considered a resident of the party where it has habitual residence;

(4) If he has or has no habitual residence in both parties, he shall be considered a resident of the party where he has nationality;

(5) If it has nationality in both parties or does not have nationality, the competent authorities of both parties shall resolve it through consultation.

For entities:

(1) shall be considered as a resident of the side where the actual management institution is located;

(2) If the party where the actual management institution is located cannot be determined, the competent authorities of both parties shall resolve it through consultation.

This article tries to use the Agreement between China and the United States on the Avoidance of Double Taxation and the Prevention of Tax Evasion on Income (hereinafter referred to as the "Agreement") to illustrate the application of the plus ratio rule. First of all, the first paragraph of Article 4 of the "Agreement" stipulates: "The term 'a resident of a Contracting State' in this Agreement means, according to the laws of the Contracting State, due to domicile, residence, head office, place of registration, or other similar criteria, in the A person who is liable to tax in a Contracting State." After that, the second and third paragraphs of Article 4 respectively stipulate that if individuals and enterprises are recognized as corresponding tax residents in accordance with the domestic laws of China and the United States, both parties " It shall be determined by negotiation that the individual/company is a resident of a Contracting State to this Agreement."

At the same time, the protocol of the "Agreement" stipulates: "When applying the second paragraph of Article 4 of this Agreement, the competent authorities of the two contracting States shall take the rules of Article 4, paragraph 2, of the United Nations Model Double Taxation Convention between Developed and Developing Countries as the rule. Accurate.” Paragraph 2 of Article 4 of this template is the “Gabi Rule”, and the judgment method is consistent with the previous one. Therefore, the following examples can be tried:

Example 1: Company A is registered in China and operates in both China and the United States, but its actual management institution is in China. Then Company A should be regarded as a resident of China because its actual management institution is in China.

Example 2: Company B is registered in the United States and also operates business in China and the United States; however, the location of its actual management institution cannot be determined. At this time, Company B shall be regarded as a resident determined through negotiation between the competent authorities of the two parties. If no agreement can be reached through negotiation, Company B shall not be able to enjoy any benefits of the tax treaty.

Example 3: Both C and his wife are Chinese citizens. They live in the United States for about 90 days a year and in China for the rest of the time. Their permanent residence is in Shanghai. The two invested a lot of money in a certain company in the United States and were members of the company's board of directors, but they were not responsible for the company's day-to-day operations. The pair also purchased several investment properties in the United States. In this example, C is recognized as a Chinese tax resident in accordance with Chinese domestic laws; in accordance with the U.S. domestic laws, he is recognized as a tax resident of the United States (according to the actual number of days of stay). Therefore, according to the relevant provisions of the "Agreement", first determine whether C has a residence in the two countries. Easy to know: C has domicile in China but not in the United States, so C is regarded as a tax resident of China, not a tax resident of the United States.

4.3 Exceptions to Gabi Rule

As of the end of April 2020, my country has officially signed 107 double taxation avoidance agreements (of which 101 have entered into force), signed tax arrangements with Hong Kong and Macao Special Administrative Regions (already entered into force), and signed a tax agreement with Taiwan (not yet effective). take effect). In the bilateral tax treaties signed between my country and other countries, the plus rules are usually based on the "United Nations Model Double Taxation Agreement between Developed and Developing Countries" (hereinafter referred to as "UN Model"), but some agreements adopt the " UN Model, such as the OECD Model, etc. Although the OECD model and the UN model have similar taxation rules, there may be different determination methods in specific agreements. Therefore, Chinese investors should pay attention to the bilateral tax treaties between the country where their business is located and my country in order to determine the corresponding taxation agreement. Than the rules.

5 Considerations for Cross-border Cryptocurrency Investment

The investment business of multinational encrypted asset investors usually spreads all over the world. At this time, in addition to the fact that the transactions in the region where the assets belong need to be taxed locally in accordance with the territorial principle, if they are recognized as tax residents of a country with a high tax rate, they may pay taxes to that country. The country bears unlimited tax liability. In order to reasonably eliminate the corresponding investment costs, this paper believes that investors can consider the following aspects:

First, try to avoid having a permanent residence in a country with high tax rates. Permanent residence is the primary criterion for judging tax residency. If an investor has a permanent residence in a country with a high tax rate, it is likely to be recognized as a tax resident of that country. Therefore, investors should try to avoid buying or leasing real estate for long-term use and residence in countries with high tax rates.

Second, try to place the center of important interests in countries with low tax rates. If the investor has permanent residence in multiple countries, he should try to place his center of vital interest in the country with lower tax rate. The center of vital interests refers to the place where personal and economic relations are closest, including family, society, occupation, property, etc. Investors can reflect the center of vital interests in the following ways:

• Live with family members in low-tax countries, or visit them frequently
• Participate in social activities, join associations, establish friendships, etc. in countries with low tax rates
• Carrying out main occupation or business activities in a low-tax country, or setting up a company, branch, office, etc.
• Invest or hold most of your property in low tax countries
• Open bank accounts, credit cards, insurance and other financial products in countries with low tax rates

Third, try to avoid having habitual residence in countries with high tax rates. If the investor does not have a permanent residence in any country and it is difficult to determine the center of interests, he should try to avoid having a habitual residence in a country with a high tax rate. Specifically, investors should try their best to control their residence time in countries with high tax rates, or provide evidence to prove that their residence in this country is temporary, such as tourism, visiting friends, business inspections, etc.

Finally, as far as investors of entities are concerned, they should try their best to locate the actual management institutions of entities in countries with lower tax rates. The de facto governing body is the highest decision-making body of an entity, usually a board of directors or similar body, which is responsible for making and implementing major decisions of the entity. If the entity has business activities in multiple countries, the meeting place of the actual management agency, the storage place of documents, the place of residence of senior executives, etc. should be set in a country with a lower tax rate to reflect that the country is an important interest center of the entity . If the party where the actual management agency is located cannot be determined, then the competent authorities of both parties will resolve it through consultation. In this case, results may be inconclusive and time-consuming. Therefore, investors should try to avoid this situation from happening, or actively communicate with the tax authorities of relevant countries to strive for a more favorable result.